Liz Truss made the cardinal mistake – and the ECB is threatening to repeat it

Since Great Britain left the EU, interest in British politics seems to have waned in Germany. The spectacular fall of Prime Minister Liz Truss is only marginally perceived with a little secret glee. This is a mistake. Because what happened to Truss provides a blueprint for what could happen to us too.

Truss' cardinal error was that she thought that budget deficits could easily be financed at low interest rates. But what was true in the low-inflation period no longer applies in the high-inflation period. As the financial markets could no longer rely on the Bank of England's money printing press to fund the announced new borrowing, the UK government bond market plummeted.

Pension funds that bought “gilts” not only with their own funds but also with borrowed funds through the use of derivatives were threatened with insolvency. In order to avoid a meltdown in Britain's financial system, the Bank of England shelved plans to sell government bonds it had previously bought to fuel inflation and temporarily supported the market with new purchases.

Truss replaced hapless Treasury Secretary Kwasi Kwarteng with Jeremy Hunt, who wiped out virtually all of the government's fiscal policies. Vain. After 44 days in office, she had to resign.

We could follow these events with pleasant horror if our politicians would not walk in the footsteps of Truss and Kwarteng. Plans for credit-financed government spending programs are also being pushed ahead in the euro area. The federal government wants to protect German citizens against rising energy prices with a 200 billion defense shield on credit.

The German "Doppel-Wumms" differs from similar protective screens in other countries primarily in its size. Since these themselves would rather go big than make a mess, but many of them are already hopelessly over-indebted, the EU Commission should now create new common debt pots or expand existing ones. As in Great Britain, a considerable volume of new government bonds can be expected to be issued.

But like the Bank of England, the European Central Bank has gorged itself on government bonds to revive inflation. And as the Bank of England wanted, the ECB would now have to sell these bonds again after its policies created a Frankenstein monster of runaway inflation.

After the experience in Great Britain, one can doubt that she dares to do that. The Bank of England now seems to want to fight inflation primarily with interest rate hikes. The ECB should also take this as a guide.

But when the central bank restricts private lending to protect lending to the state, it helps transform the market economy into a state economy. We are threatened with a loss of prosperity not only through inflation, but also through a fat and sluggish state.

Thomas Mayer is founding director of the Flossbach von Storch Research Institute.

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